Stock repurchases as an earnings management mechanism the impact of financing constraints

[...]... is suspected of engaging in earnings management behavior We define HABITt as the number of times the firm meets/beats the quarterly analyst earnings consensus and LOGANALYSTt as the logarithmic transformation of the number of analysts covering the firm before the earnings release date As shown in panel A of Table 6, we find that the mean values for both of these variables are significantly higher for... earnings management and financing constraints Turning to other real earnings management techniques we document a significantly negative relation between other real earnings management techniques and financial constraints (models (3), (4), and (5) in Panel C) These results suggest that financing constraints limit the firm's ability to manage earnings through real earnings techniques and enhance the firm's... are suspected of earnings management Panels C and D examine the impact of financing constraints on accretive repurchases and other earnings management techniques among suspect firms by controlling for potential sample selection bias using Heckman two-step regressions Panel C reports the results of parsimonious specifications whereas Panel D reports the results of full specifications The first stage... statistics for the subsample of suspect firms We document approximately 16.9% accretive share repurchases for the firms suspected of earnings management The mean level of abnormal accruals, abnormal production, discretionary expenditures and combined real earnings management proxy are 0.0308, −0.0369, 0.066 and 0.025 Table 6 Impact of financing constraints on accretive repurchases and other earnings management. .. show that financing constraints impact the choice of earnings management techniques 4 Summary of results and conclusions We document that share repurchases have become more prevalent as a mechanism to manage earnings By the end of our sample period, 50% of repurchasing firms engage in accretive share repurchases We provide evidence that financially constrained 5 The distributional properties of z-score... incentives to manage earnings and regulatory constraints impacting the use of discretionary accruals in the post-SOX era may explain the greater reliance on share repurchases to manage earnings during these periods We also show that for firms that are more likely to be engaging in earnings management activities, financing constraints influence the choice between alternative earnings management mechanisms We... accretive share repurchases Thus, the presence of financing constraints discourages the use of repurchase-based earnings management explaining why many firms do not engage in accretive repurchases Although we find that financing constraints can reasonably account for aggregate accretive repurchases, two sub-periods (1997–2000 and 2006–2008) exhibit abnormally positive accretive repurchase activity Both... Signs and magnitude of the medians are consistent with Zang (2012) Combined real earnings management proxy (RMt) is defined as the sum of AB_PRODt and AB_DISCt and has non-zero mean due non-overlapping missing observations in AB_PRODt and AB_DISCt The median value for RMt is 0.0543 and is comparable to those reported in Zang (2012) Next, we examine the relation between financing constraints and earnings. .. and/or (3) if the firm just meets or beats mean analyst EPS forecasts (if 0 ≤ EPSt − Consensust ≤ $0.01) HABITt measures the number of times the firm meets/beats quarterly analyst earnings consensus LOGANALYSTt is the logarithmic transformation—defined as log (1 + x) for variable x of the number of analysts covering the firm before the earnings release date Panel B shows the summary statistics of firms... incentives and earnings management Account Rev 80, 441–476 Chi, J., Gupta, M., 2009 Overvaluation and earnings management J Bank Finance 33, 1652–1663 Cohen, D., Zarowin, P., 2010 Accrual-based and real earnings management activities around seasoned equity offerings J Account Econ 50, 2–19 Cohen, D.A., Dey, A., Lys, T.Z., 2008 Real and accrual-based earnings management in the pre- and post-Sarbanes–Oxley . regarding the use of share repurchases as an earnings management mechanism in the presence of debt -financing constraints as well as the impact of these constraints on the use of accruals and other. earnings, financing constraints is a major determinant of accretive repurchases as well as other types of accruals and real earnings management techniques. The remainder of the paper is organized as. covering the firm before the earnings release date. Panel B shows the summary statistics of firms that are suspected of earnings management. P anels C and D examine the impact of financing constraints